This will, I think, be my last contribution to this debate. So let me start by responding to Jo, Stuart and Ben.

Am I, as Jo says, confused about the riskiness of Anglo-Saxon banking? I think not. I have long been aware of the fragility of banking as an industry and have written about this many times over the years. As my recent book, Fixing Global Finance, notes, there have been more than 100 banking crises in the world over the past three decades. So this is not news to anybody who is reasonably well informed. I have similarly been well aware of the crisis-prone nature of US banking, in particular. So that is not new either.

Philip is certainly right: why shouldn’t the state have a say, when it is propping up the institutions in question?

The evidence on this is intriguing: CEO pay seems to be much more closely pegged to meaningful measures of performance if there is a large shareholder such as a controlling family or a Buffett figure. Meaningful measures are things such as share price performance relative to close competitiors. But when shareholders are dispersed, CEOs get away with sloppy measures of performance.

Governments are large shareholders in some banks. In principle, they should be able to follow this example and set pay that encourages effective performance.

Whether politicians attempting to appease a baying mob are going to do a good job of this… we’ll see.

1) Bonuses are generally tied to four metrics: individual performance, desk performance, divisional performance and bank performance. So if one guy has a terrific year and the rest of his team or the rest of the bank didn’t, he wouldn’t be rich beyond his wildest dreams. Bonuses are a reward for being
part of a profitable group. In that sense, they encourage cohesion.
2) Bonuses do not move around much. Go back a decade, and there’s usually about 15-20% annual variation in the amount paid. As such, there is an expectation that the bonus is part of overall compensation
3) Most traders do not earn millions. Most in London take home between £100k and £500k. Is that too much? That’s another question. And all have outgoings to match…

Lex is always happy to leave herrings aside, especially red ones. But when economists write “I do not think anybody can possibly disagree with this position”, Lex is quick to detect a fishy smell. Martin Wolf wants “financial institutions to be privately owned and run, though subject to clear and cogent regulation”. That is pure Obamaspeak: impossible to disagree with because it is beautifully obtuse. How much clear and cogent regulation? Too much and eventually there will be nothing private left.

We don’t need to think that bonuses were an important cause of the crisis in order to criticise them. I doubt that they made a large difference. The mistakes made by the banks were not just a product of misaligned incentives, but just as much of misperceptions of reality.

If many bankers actually thought that they had a sustainable and highly profitable business model – they shouldn’t have, but they probably did – then even if their motivations has been completely aligned with shareholders’ interests, they would have entered the same investment positions as they actually did (their remuneration would just have reached less astonishing levels).

And what did people call Talleyrand? “A shit in silk stockings”, I believe, or “de la merde dans un bas de soie” in the original.

Anyway, just a couple of quick points:

First, re the big wobble: there seems to be a logical inconsistency in your position, if I understand it correctly. On the one hand, you cite Keynes’ “if the facts change, I change my mind…” to justify the big clampdown. Then on the other hand you say that my statement that systemic breakdowns are surprisingly rare in the free-wheeling Anglo-Saxon model is false and argue that they in fact happen on average about once a decade.

As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.” That seems to be Jo’s position. It is not mine. I am with Keynes who said, “When the facts change I change my mind – what do you do sir?”

Let me be clear, I am arguing neither in favour of nationalization nor in favour of financial repression. On the contrary, I want the financial institutions to be privately owned and run, though subject to clear and cogent regulation. I do not think anybody can possibly disagree with this position. We are only discussing the content and structure of that regulation.

With maximum respect, I think you are performing the most enormous wobble. It is surprising to see an economist of your distinction make the case that the UK should suddenly decide that what it needs more than anything else is financial repression.

Economists have for yonks agreed that financial repression – whether through high bank reserve requirements, government-determined credit allocation or straightforward government domination of banks – prevents the efficient allocation of capital and thereby impairs economic growth (of which we have precious little to begin with). Our system has not been perfect. But it has not been so imperfect that we all now deserve to be permanently repressed.

My esteemed colleague, Jo Johnson, is confusing the issues. So let me reply to his points in turn.

First, do I want the banks I support as a taxpayer to be utilities? Yes, yes, yes. In fact, I would be delighted if they were utilities. But what has this to do with the fate of the City of London? Nothing. The City of London is an offshore financial centre. It does not depend on institutions guaranteed by the British taxpayer. If foreign-owned financial institutions wish to operate in London because of the skills on offer and foreign taxpayers are also happy with the risk their institutions are running there, I would be delighted that these “world-class skills”, so powerfully demonstrated in recent years, be gainfully employed.

Surely the key question is whether we think the government is better at setting incentives for bankers than private institutions?

There is no argument that the current system has deep structural flaws: bonuses were based on short-term, sometimes fictitious profits. They did not properly reflect the risks involved, and the social costs of those risks. And despite the industry’s claims to the contrary, bonuses have proved much less flexible when profits are falling than they were on the way up.

About Lex vs Martin Wolf

This blog is no longer updated but it remains open as an archive.

The debate over bankers' bonuses has polarised opinion, even within the Financial Times. FT.com invited Jo Johnson, Lex column editor and Martin Wolf, our chief economics commentator, to share their spirited discussions with readers. Other FT writers have also joined the debate.